Deep Breaths, Market, Deep Breaths

The five-hour time difference between New York and London allows you to chase a Wall Street crash with a nice whisky. If you’re still eating dinner, a bottle of Malbec makes almost any stockmarket rout more bearable. Such was the case on Friday.

The Dow Jones Industrials were down as much as 500 points during the session. ‘Bar tender, I’ll have another’. They trimmed the loss by the close. But at 15,988, it was the first close under 16,000 since August of 2015. UK futures were up this morning. The sun is out. The world hasn’t ended.

But did you see that retailing giant Walmart announced the closure of 267 stores on Friday? 154 of those are in the US, with another 60 in Brazil. And to put things in perspective, the big-box discount retailer still has over 11,000 stores around the planet. Amazon hasn’t crushed it just yet.

Still, now you know how China’s stockmarket and the rest of the planet are linked. If China’s slow-down is more like a debt-deflation/depression, then the entire world is going to grow less fast (if at all). That’s why equity markets freaked out. They are pricing in much slower global growth — or even the end of the globalisation as we know it.

SpaceX setback

Meanwhile, in the world of exploration and opportunity, Elon Musk pushes the envelope. Last month it was the Falcon rocket delivering a payload to space and then safely returning to a landing pad. The company upped the ante over the weekend.

The first part went okay. The Falcon delivered a payload into orbit. But this time it tried to land on a barge in the ocean. If it were a figure skating move, the degree of difficulty would have been ‘very high’. One of the struts on the rocket failed. It tilted over and exploded.

That may not seem like it has anything to do with the oil price or the level of the FTSE or the vote to leave the European Union. It doesn’t. But that’s my point. There’s a whole other world out there.

The Trump top and the oil bottom

Here’s an idea of how politics, oil, the pound, and the dollar may converge. Not ‘how’ so much as ‘when’. Try 1 February, or 9 February. More or less. Why?

I’ll get to it in a moment. But let’s take oil first. It keeps falling, both Brent and West Texas Intermediate crude. Iran enters the race to the bottom for control of market share in Opec this week. Most sanctions freezing the country out of global capital and energy markets were officially lifted over the weekend. The Iranians are free to pump as much oil as they’d like. Because that’s what the world needs more of!

Last week I asked how much of oil weakness was really dollar strength? The reason I asked is that, all things being equal, you’d expect a bottom in the oil price to coincide with a top in the dollar. The price action in the pound also tells you a bit about dollar strength. Namely, you’ve seen global capital reallocated away from ‘risk’ and emerging markets and into the dollar. Dollar strong. Greenback smash!

Source: StockCharts


But keep your eye on the first 10 days of February. That’s when you’ll know how seriously to take Donald Trump and Bernie Sanders. The Iowa caucuses take place on the first. New Hampshire has its primary eight days later. What will you learn?

Iowa and New Hampshire are small states. They don’t represent much of America. And most of the campaigning there is pure theatre, meant to winnow out the field of candidates for ‘Super Tuesday’ in March.

But, Iowa and New Hampshire will be the first time anybody actually casts a vote for Trump or Sanders. Up until now, it’s all been polling. Trump’s enjoyed support from between 30–40% of Republican voters in the polls. Will that carry over to actual votes? And can Sanders narrow his double-digit gap on the presumptive Democratic nominee, Hillary Clinton?

I’d suggest that a poor performance by Trump and a strong performance by Clinton would actually be dollar bearish. Why? It would mean America is not a car being driven by Thelma (Trump) and Louise (Clinton) headed over the proverbial cliff. The prospect of a radical result from the US election having been diminished means it will be safe to put some more ‘risk on’ bets in markets.

Oil would rally. The dollar would fall. And emerging markets might catch a bid. Gold?

That’s the wild card. Charlie Morris reckons gold has about a 30% premium to ‘fair value’, based on his calculations. Gold has retained that ‘premium’ despite dollar strength. And in a generally ‘fearful’ world, you haven’t seen a correspondingly bullish move in gold.

That’s the risk. Yes, it would be weird to see both gold and the dollar fall together. But you’re seeing all sorts of weird things these days. And if you’re a gold investor or a bullion owner it’s a risk you should be well aware of as political season hits high gear.

There’s more than a political aspect to it, too. Everything falls in a deflationary depression. That includes gold. It’s just such a fall that has me worried right now.

Walpole’s ghost backs Brexit

It’s a good week to not be Angela Merkel. The German chancellor will spend most of today chairing a contentious executive meeting of the Christian Democratic Union party. It’s her party. But they are not happy with her. Inviting a million immigrants into your country without a plan for the economic and cultural backlash will do that. Meanwhile, her finance Minister, Wilhelm Schaeuble, has called for an EU-wide petrol tax to pay for the European Union’s crisis.

Good luck to David Cameron showing how the UK will be safer and more secure as a member of the EU. As a member of the EU, Britain can argue against a petrol tax. But it will likely pay it anyway, which is to say you will (while having no say in how the funds are spent). That’s life in the EU.

Yet British papers were full of stories this weekend on how the prime minister expects to get a good deal when he meets with EU boffins on 18 and 19 February. He can take the result of those ‘negotiations’ to the British public, and argue that Britain is better off in Europe. It is certainly the conservative position.

In fact, the Conservatives for Reform in Europe came out of the closet this weekend. Led by MP Nick Herbert, they will argue that leaving the EU now is a ‘jump into the void’. It may not be a ‘tantrum’ or a ‘betrayal’ of the EU in its hour of need. But the language of fear has made its appearance.

Here’s an idea: if a ship is sinking, you should jump while you can.

But the idea that conservatives — some of them — are for staying in a bad deal reminded me of Friederich Hayek’s great essay, Why I’m not a conservative. You’ll find some key excerpts below. But the basic idea is simple: conservatives tend to be fond of authority and tradition when it suits their purposes, even if siding with the state comes at the expense of individual liberty.

The man generally regarded as Great Britain’s first Prime Minister, Robert Walpole, wasn’t a Tory. He was a Whig. As Hayek points out:

It was the ideals of the English Whigs that inspired what later came to be known as the liberal movement in the whole of Europe and that provided the conceptions that the American colonists carried with them and which guided them in their struggle for independence and in the establishment of their constitution.

Indeed, until the character of this tradition was altered by the accretions due to the French Revolution, with its totalitarian democracy and socialist leanings, ‘Whig’ was the name by which the party of liberty was generally known. The name died in the country of its birth partly because for a time the principles for which it stood were no longer distinctive of a particular party, and partly because the men who bore the name did not remain true to those principles.

The Whig parties of the nineteenth century, in both Britain and the United States, finally brought discredit to the name among the radicals. But it is still true that, since liberalism took the place of Whiggism only after the movement for liberty had absorbed the crude and militant rationalism of the French Revolution, and since our task must largely be to free that tradition from the over rationalistic, nationalistic, and socialistic influences which have intruded into it, Whiggism is historically the correct name for the ideas in which I believe.

The more I learn about the evolution of ideas, the more I have become aware that I am simply an unrepentant Old Whig – with the stress on the ‘old’. To confess one’s self as an Old Whig does not mean, of course, that one wants to go back to where we were at the end of the seventeenth century. It has been one of the purposes of this book to show that the doctrines then first stated continued to grow and develop until about seventy or eighty years ago, even though they were no longer the chief aim of a distinct party. We have since learned much that should enable us to restate them in a more satisfactory and effective form. But, though they require restatement in the light of our present knowledge, the basic principles are still those of the Old Whigs.

True, the later history of the party that bore that name has made some historians doubt where there was a distinct body of Whig principles; but I can but agree with Lord Acton that, though some of “the patriarchs of the doctrine were the most infamous of men, the notion of a higher law above municipal codes, with which Whiggism began, is the supreme achievement of Englishmen and their bequest to the nation” – and, we may add, to the world.

It is the doctrine which is at the basis of the common tradition of the Anglo-Saxon countries. It is the doctrine from which Continental liberalism took what is valuable in it. It is the doctrine on which the American system of government is based. In its pure form it is represented in the United States, not by the radicalism of Jefferson, nor by the conservatism of Hamilton or even of John Adams, but by the ideas of James Madison, the “father of the Constitution”.

I do not know whether to revive that old name is practical politics. That to the mass of people, both in the Anglo-Saxon world and elsewhere, it is today probably a term without definite associations is perhaps more an advantage than a drawback. To those familiar with the history of ideas it is probably the only name that quite expresses what the tradition means. That, both for the genuine conservative and still more for the many socialists turned conservative, Whiggism is the name for their pet aversion shows a sound instinct on their part. It has been the name for the only set of ideals that has consistently opposed all arbitrary power.

What is the modern European Union but an institution of unaccountable and arbitrary power? Conservatives who support that power do so out of a fondness for authority (and an aversion to democracy). They also do so out of a basic misunderstanding of economics. They fear the ‘void’ more than they believe in the ‘free market’.

Britain can’t lead Europe from within Europe as long as the European Union dominates. It is relentless drive to political centralisation, no matter what ‘concessions’ the prime minister earns next month. If Britain wants to lead Europe, it should leave the EU first and show everyone else the way.


Dan Denning,

Contributor, Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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